Even before the evening of August 21, Hiroshi Mikitani, the founder of Japan’s biggest ecommerce company, was having a tough summer.

Rakuten’s recently launched mobile business was bleeding cash, shareholders were questioning his investment acumen and the market was sending ominous signals about the planned listing of the company’s online bank.

But five seconds of video, taken at an undated party and posted on social media on August 21, have plunged Mikitani into a new dimension of potential trouble.

The footage, shot in what appears to be a nightclub, captures a beaming Mikitani, wearing his trademark black T-shirt, surrounded by young women and pouring Dom Pérignon champagne into the mouth of a partygoer. The video went viral. It could not have emerged at a more awkward time.

The scandal followed weeks of speculation — including among investors — over some of Mikitani’s recent exchanges on Twitter. In late June, he spent 20 minutes locked in a late-night online spat with a YouTuber-turned-parliamentarian over allegations of a mysterious “President M” and his taste for parties with Ukrainian women.

There was nothing to link President M with Mikitani, but the Rakuten founder later broke his silence, writing on Twitter: “When there are Ukrainians suffering from the war, what’s wrong with having a party so that they can forget about the war?”

Rakuten said: “We decline to comment on accusations that are untrue, misconstrued or taken out of context. We are currently considering our options for legal action against these false accusations and speculation.” Mikitani did not respond to a request for comment via the company.

An ill-timed scandal

Shareholders told the Financial Times that it was stunningly bad timing for Mikitani — however unfounded the allegations may be. The entrepreneur has been defending his corporate reputation and business vision in increasingly tense engagements with investors as the company faces its great question of late 2022: how to draw interest in the listing of an online banking unit in the middle of a global tech rout and the worst market conditions.

Analysts said the initial public offering of Rakuten Bank will be critical in stemming a haemorrhage in free cash flow at Mikitani’s group as it builds a mobile network to compete against the likes of SoftBank and NTT DoCoMo. Rakuten also announced in May that it was preparing to list its online brokerage unit.

If successful, Mikitani would be a step closer to achieving his dream of marrying retail with telecoms, a feat few global retailers have managed to deliver.

People involved in the talks said Mikitani was targeting a valuation of more than two times price-to-book ratio — estimated by JPMorgan to be about ¥360bn ($2.6bn) — for Rakuten Bank, which would be comparable to South Korean rival Kakaobank, which listed shares in Seoul a year ago.

But potential investors approached by Daiwa, which has been hired as an underwriter for the IPO, said the targeted valuation was too high considering the market environment. Daiwa declined to comment.

Kakaobank is worth Won13tn ($9.6bn) after falling about 30 per cent below its IPO price. In March, SBI Sumishin Net Bank, another Japanese online bank, postponed its IPO, blaming market turmoil caused by Russia’s invasion of Ukraine.



Mitsunobu Tsuruo, analyst at Citigroup, said Rakuten needed to consider other financing options, because seeking a high valuation for the listings of both its banking and securities units was unrealistic under the tough market conditions.

The brokerage estimated a free cash flow deficit of ¥460bn this year at Rakuten and another ¥230bn next year. The group has already reported a deficit of ¥460bn for its non-financial business in the first six months of the year.

Ballooning capital expenditure

The negative free cash flow comes as Rakuten’s capital spending plans have exploded since it launched its mobile carrier service in 2020. Mikitani initially told investors the company would need about ¥600bn to build its mobile network, but Rakuten has already spent more than ¥1tn and Citi estimates that will rise to ¥1.9tn.

Rakuten’s shares have tumbled more than 40 per cent this year on concerns about its financial strength, even as the company has said it will explore other financing options such as issuing bonds. Last year, the company raised $2.2bn through capital tie-ups with Japan Post Holdings, Chinese tech group Tencent and US retailer Walmart.

“It doesn’t look like Rakuten can raise the necessary funds to invest in growth while continuing to run a huge free cash flow deficit. At least the markets are concerned and that is why the share price is being driven by credit risk,” Tsuruo said.

In the April to June quarter, the company’s operating loss widened from ¥63.5bn to ¥84.5bn with challenges in its mobile business wiping out the gains from its ecommerce segment. The mobile unit recorded a net decline of 220,000 subscribers, although the drop was mainly due to termination of plans that allowed users up to 1GB of monthly data for free.

“It’s a total dreamworld for Rakuten Mobile. It’s blown up the company and now they’re being forced to sell off the good bits to feed this giant sinkhole of debt,” said one leading asset manager who has held Rakuten shares over the past year.

Rakuten said the mobile losses had peaked and hoped that the business would convert into a source of steady cash flow, similar to how SoftBank has fared with its domestic mobile business.

But while SoftBank founder Masayoshi Son used an exclusive deal to sell Apple’s iPhone in Japan to transform the company into the country’s third-largest carrier, Mikitani has not found a similar weapon to alter the competitive landscape.

“For the mobile business, I can’t see when the business will ever turn profitable under the current circumstances,” said Tetsuro Tsusaka, analyst at Morgan Stanley.

“Mobile is already a commoditised business, so anyone with money and time can do it. But if you don’t have the money, then you have to lower the cost base until you reach the break-even line” even if the quality of the mobile network is compromised, he added.